What the Future Holds for TFSAs
TFSAs have been around since 2009 and by all accounts, roughly half of Canadians have opened one. However not all these people are using their TFSA to their full potential, either due to confusion on the rules, lack of education, or quite simply a lack of income to put into them in the first place.
Higher annual contribution limits
When the TFSA was unveiled it had an initial annual contribution limit of $5000. The plan was for this limit to be increased in $500 increments every couple of years to account for inflation to a max of $10,000; in 2015, $10,000 was the limit, but unfortunately the Liberal government pared this back to $5,500 again which is where it now sits.
For Canadian taxpayers this has been both a boon and a dilemma. All of a sudden you could be stashing $5,500 away each year, tax free. At that rate it wouldn’t take long for Canadians to potentially have six-figures of annual contribution room! Just move your previously taxable investable assets into your TFSA and boom! you’ve just sheltered a lot of money.
The dilemma for the average Canadian is how to find $5,500 every year to put in the TFSA in the first place. Even with the current limit, most Canadians putting money in their TFSAs aren’t putting in the full $5500 simply because they don’t have the financial resources.
Effects on the overall Canadian economy
For the Canadian economy, the TFSA has a significant effect. All of a sudden large amounts of previously taxable money are sheltered, lowering the amount of income tax collected by the Federal government. Less tax collected means less money available for the things taxes pay for…highways, healthcare, education, and so on. Where will this money come from?
Effects on the elderly
With an aging population you have to consider the impact of less available tax dollars on government programs associated with the elderly. Because your CPP and OAS benefits are unaffected by TFSA income, you’ll be able to potentially enjoy more benefits. However this assumes these government programs will survive in their present-day form in the future. If there is a future financial crisis due to a lack of funding (courtesy of less income tax being collected) those benefits could be severely reduced. On the flip side, if seniors had more retirement income in the first place (courtesy of TFSAs) that would theoretically reduce their dependence on these same government programs.
How to mitigate these issues
Presumably those that enacted the TFSA program had ideas in mind for this eventuality. As in the past with funding shortfalls, the Federal government could deal with this by increasing existing taxes or introducing brand-new taxes. Alternatively they could cut spending elsewhere.
Over the long term, average Canadians may need to change their views as well. Already Canadians are working longer and cutting into traditional retirement years. The elderly may find themselves moving in with their children to avoid retirement home costs or pension plan cuts. And perhaps user-pay models will become more common as national government programs suffer from a tax shortfall. The next 20 years will indeed be interesting as these issues become more prominent in our society!